How the company would work

How the Company Would Work
The idea is to get a group of people to come together be the shareholders of Paekakariki Housing Ltd. Shareholder funds would be used to purchase a house and I will use the example of Raima's house in terms of cost.
I am careful not to call for investment but rather for shareholders - it amounts to the same thing in most ways but the Financial Markets Act makes it illegal for us to seek investors without jumping through legal hoops. However we can come together and form a company.
The company would need at least 40% deposit to buy a house [the banks will not/are not allowed to lend any more than this]. This figure also represents the deposit required to avoid having to pay a weekly 'top-up' over and above Raima's $420 rent. To achieve this I have modified our original calculations to assume that most maintenance work can be done by the community at little/no cost.
So we would need $200,000.00 of shareholders funds. Shareholders would participate on the understanding that we seek to provide a return but that this return is limited by two things. Firstly the house may not increase, and indeed may conceivably decrease in value resulting in a loss to the shareholders. However it is more likely there will will an increase. The idea is that shareholders will accept a capped return say 4% per annum. This is a reasonable return [compared to say bank deposits and 10 year government bonds currently at 3.2%]. Any capital gain over and above this will be used to further the aims of the Paekakariki Housing Trust. The term would be say ten years. After ten years the house is sold [hopefully to Raima] to a purchaser or another group of shareholders or some shareholders may wish to rollover their funds. All returns are before tax of course.
I have checked with a mortgage broker I have used before. He confirms that the bank will require one or two guarantors, so finding these [who will probably need to be directors of the company] is critical. The banks will not deal with a big group, in fact even a family group coming together to buy a house usually need to be represented by one or two people and legal agreements between the other parties are done separately.
However he does believe the model is viable in terms of securing a mortgage.

How will Raima benefit?
The initial model relies on the rent being income to the company so this does not change Raima's position as a tenant. So she needs to be able to purchase shares in the company, in the first place by way of community contributions forming an initial sum. Secondly over time she could buy parcels of other shareholders shares, enabling an increase [albeit small] in the house ownership and equity. In effect a method of buying the house outside normal bank arrangements. Over time as perhaps Raima's household income rises there will come a time when a proper mortgage to buy out all or a good proportion of shareholders is possible.
Alternatively we get more than $200,000.00 and the decrease in mortgage servicing costs is apportioned to the rent so that a portion of Raima's rent goes toward buying shares in the company. In essence this would be similar to a normal mortgage, most of the payment is interest cost with a small part capital repayment.

Who could be a guarantor?
In my opinion they would need to be; A willing person who will be exposing themselves to a small but real risk. That person must understand the situation, have a legal agreement with the company such that they would get ownership and/or payments from proceeds of the sale of the house before shareholders capital is returned.
They would need to have assets sufficient to satisfy the bank they could cover repayment of the mortgage.
An ongoing involvement in the company so they can be aware of any problems/issues that arise.

Spreadsheet assuming $200k raised by company

Hi all first of all well done on all of the progress so far. I'm concerned with my experience of being involved in rental properties that there isn't a budget for maintenance. Simple ongoing maintenance could perhaps be covered by the community but things like a leaking toilet at 5am or a re-roof of the property need funds. Also what's the story with insurance?

Hi Janet
Good points, we have allowed an annual sum for insurance, rates and maintenance - currently at $3850.00 on spreadsheet. I originally allowed $5k but have been fiddling to see where we need to be so the income matches the outgoings.

How long would shareholder's money be tied up?
The intent is ten years and at that time we would look to get Raima to buy us out as option number one, alternatively a new set of shareholders will get involved and/or existing ones will roll over. But the bottom line I think is that if necessary the house will be sold such that the shareholders get their capital and return paid out.
If a shareholder had financial problems, got sick or whatever we would try and find an alternative shareholder to get involved but there is no guarantee of being able to do this. So a shareholder should expect that they will not see any money returned for the whole ten years.

Hi Mark, Well done, this is looking good, although I suppose finding the guarantors may take a bit of time. Is it possible to explain more clearly why, with the 200k deposit, that Raima's subsequent rent can not be, straight away , at least contributing to gaining a greater share in the ownership (ie more equity). I understand that her 'rent' is going towards interest repayment on the mortgage, but can we not work out the maths that at least some of it is going towards principle repayment and thus every week it is also increasing her share in the property? No doubt i am being slow here, but it would be good to understand this better as we all seem to agree that her eventual ownership is the shared objective here. Many thanks for all you have done on this and for your patience with financial dumbos like me.

Hi Justin no that is a good point and my next plan is to try and model options for what you say. In the first instance I have started at a point where we don't need ongoing top-ups which is messy and risky over time [keeping the money coming in I mean],